Measuring knowledge management as a strategic resource

1
Measuring knowledge management as a strategic
resource

• Professor Brian Corbitt
• Shinawatra University, Thailand
• Deakin University, Australia

2
Background to the Strategic KM project

• KM workshop for CEOs and CIOs in Bangkok in
  December 2004.
• Key question
• What is the real strategic value of KM to my
  organisation?

3
Strategic Value of KM

• Managing organizational knowledge is considered
  to be a strategic asset (Bollinger and Smith,
  2001 Michalisin et al 1997 and de Hoog and van
  der Spek, 1997).
• In fact since 1980 much has been written about
  the strategic value that organizations gain from
  knowledge and other intangible assets. It has
  been well argued that new knowledge adds
  considerable value within an organization.

4
Strategic Value of KM

• However we are still unsure about what the real
  measure of that added value is strategically.

5
Strategic Value of KM

• Kankanhalli and Tan (2004) noted the lack of
  studies focusing on evaluation of Knowledge
  Management (KM) strategy and highlighted the lack
  of standards which has lead to a proliferation of
  measures and difficulty in comparing the outcomes.

6
Strategic Value of KM

• The presentation defines the strategic value of
  KM and suggests a new conceptual framework
  against which organizations can evaluate
  strategic value.

7
Knowledge as a strategic asset

• The characteristics of a strategic asset or
  resources are defined as one being valuable,
  rare, inimitable and non-substitutable (Bollinger
  and Smith, 2001).

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Knowledge as a strategic asset

• Strategic assets are the critical determinants of
  an organisations ability to maintain a
  sustainable competitive advantage.

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Knowledge as a strategic asset

• However, how do we know what the value of that
  knowledge is as a strategic resource or asset.
• We know considerable detail about the estimated
  price value, and cost value of knowledge.
• Typical business metrics focus on these elements.

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Knowledge as a strategic asset

• One Fortune 50 manufacturing organization in the
  USA spent 22 million developing a database for
  their 3 million documents.
• 1.5 million extra value was traced by an account
  director in British Telecom to his teams use of
  the BT Knowledge Management System, Intellact.

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Knowledge as a strategic asset

• However Kochhar (1997) argues that the possession
  of a source of sustained competitive advantage
  like KM or a KMS is not sufficient to obtain
  improved value.

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Knowledge as a strategic asset

• Knowledge management is a conscious strategy for
  moving the right knowledge to the right people at
  the right time to assist sharing and enabling the
  information to be translated into action to
  improve the organizational performance (O'Dell
  and Grayson 1997). 

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Knowledge as a strategic asset

• Alstete (2003) states that a knowledge management
  process that incorporates a solid planning model
  with concerns about strategic knowledge asset
  security seems to be needed in todays world of
  multiple threats from competitors and others who
  seek to steal or destroy knowledge assets.

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Knowledge as a strategic asset

• Measuring the knowledge asset, therefore, means
  putting a value on people, both as individuals
  and more importantly on their collective
  capability, and other factors such as the
  embedded intelligence in an organisation's
  computer systems.

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Solutions to the value proposition for knowledge
management

• In the literature three co-existing yet
  emphatically different sets of measures and
  metrics exist with regards to the value of
  knowledge and knowledge management in
  organizations.
• In the Finance literature the focus is on
  Strategic Value analysis (SVA).
• In Information systems the approach uses
  accounting measures and other metrics to measure
  the impact of the implementation of KMS and KMI.
• In management the focus has been on process.

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Solutions to the value proposition for knowledge
management- finance

• Yoshikawa et al (2002) argue that KM unleashes
  value through process clarification, process
  efficiency, business model flexibility, market
  insights, customer loyalty and productivity
  increases.

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Solutions to the value proposition for knowledge
management- finance

• Market and company financial data are used to
  make a distinction between operating value and
  strategic value.
• Operating value (OV) is based on current
  profitability (NOI) and operating capital (OC).
  More precisely
• OV PV of NOI OC.

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Solutions to the value proposition for knowledge
management- finance

• Since investors value both current and potential
  future profitability, their expectations of
  future profits are built into the share price.
• From that, strategic value (SV) is determined as
  the difference between market value (MV) and
  operating value, or
• SV MV - OV.

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Solutions to the value proposition for knowledge
management- finance

• By determining strategic capital (SC), i.e.,
  capital not used in calculating NOI, and
  subtracting that from strategic value, we get the
  value added on strategic capital (SCVA), or
• SCVA SV - SC

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Solutions to the value proposition for knowledge
management- finance

• There is another aspect of the strategic value
  of knowledge to an enterprise - competitiveness
  improvement.
• This represents business value that could be
  derived if you could convince the customer or the
  employee to give it to your organization rather
  than to a competitor, or knowledge to your
  organization rather than it remaining inert.
• That difference between actual and strategic
  value can be added to by knowledge.

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Solutions to the value proposition for knowledge
management- finance

• However, operating value can be more precisely
  defined in terms of the assets that create that
  value.

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Solutions to the value proposition for knowledge
management- finance

• In effect operating values from the cost
  perceptive ignores the costs specific to the type
  of resources.
• Operating costs are affected by the cost of fixed
  assets, mostly capital, plus variable costs such
  as disposable assets, intangibles and the costs
  of labour.

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Solutions to the value proposition for knowledge
management- finance

• What is the nature and cost of knowledge?
• There is both the opportunity cost of tacit
  knowledge being inert, the opportunity cost of
  access of tacit knowledge by competitors and the
  actual costs of maintaining employees with the
  explicit knowledge needed by the organization.

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Solutions to the value proposition for knowledge
management- finance

• In addition there is the transfer cost of both
  explicit knowledge and the transfer cost of tacit
  knowledge when exposed.
• Finally there are the costs of knowledge capture,
  knowledge audits and knowledge exchange.
• Each becomes a cost because each represents an
  opportunity cost of non-disclosure or forgone
  disclosure.

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Solutions to the value proposition for knowledge
management- finance

• Therefore we can rewrite the equation of OV to
  be
• OV PV of NOI OC
• OV PV of NOI (VFA VA VCHR)
• Where the variable costs of HR can be explicitly
  measured by productivity (VP) and the value of
  knowledge (VK).
• OV PV of NOI (VFA VA VP VK)

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Solutions to the value proposition for knowledge
management- finance

• By substitution this equation can reflect the
  variables influencing the real value added on
  strategic capital, a key concern for the actual
  value of a business.
• SCVA MV - PV of NOI (VFA VA VP
  VK) SC
• The key to this equation is that any change
  created by adding value through knowledge will
  mean not only an increase in the operating value
  of an organization but also and more importantly
  the strategic value of the business.

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Solutions to the value proposition for knowledge
management - IS
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Solutions to the value proposition for knowledge
management - Management

• Management have used an alternative focus.

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Solutions to the value proposition for knowledge
management - Management

• They argue that researchers have to look beyond
  merely developing measures
• They argue that knowledge measurement should
  articulate, test and reinforce connections
  between knowledge and competitive advantage.

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Solutions to the value proposition for knowledge
management - Management

• AND they acknowledge that there is no shortage of
  measures of intellectual capital
• BUT
• What they argue is needed is a set of measures to
  assess the role of knowledge in the
  organizations value chain.

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Solutions to the value proposition for knowledge
management - Management

• Boudreau (2003) and De Nisi et al (2003) propose
  that KM measure relate to three organizational
  structures Knowledge stock, knowledge flow, and
  knowledge enablers

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Solutions to the value proposition for knowledge
management - Management

• Knowledge stock the existing level of knowledge
  at any point in time (includes, patents,
  financial statements, annual reports, policy
  documents, other publications, citations,
  research reports, process and operational
  manuals, archival directories of organizational
  experience HR repositories.

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Solutions to the value proposition for knowledge
management - Management

• Knowledge flow - the movement of knowledge
  between entities

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Solutions to the value proposition for knowledge
management - Management

• Knowledge enablers - the levels of organizational
  investment, structures and activities established
  by any organization aimed at changing or
  maintaining knowledge stocks or influencing
  knowledge flows.

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Solutions to the value proposition for knowledge
management - Management
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A framework of strategic measure of KM

• The financial analysis of the value of knowledge
  infers that the inherent value of knowledge
  increases the strategic value of the business.
  The question is by how much?

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A framework of strategic measure of KM

• IS literature shows that the use of operational
  based measures of KM _based systems,
  data-warehouses, expert systems, Intranets etc
  can enable some understanding of the metrics
  possible to determine the value of knowledge.

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A framework of strategic measure of KM

• In effect there are no standards so comparative
  studies at the operational level of KM are
  currently not supportable, eg tacitness
• deviations between employees and partner ratings
  of behaviors relating to managing self.
• ratings about codifiability, complexity and
  systems dependence of engineers.
• ratings of information based on various
  dichotomies e.g. simple V complex, easy V
  difficult to document, obvious V subtle etc

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A framework of strategic measure of KM

• However, such impact I believe begs a larger
  question, that of strategic impact.
• Like all accounting and financial measures
  aggregation is possible and is the way of
  managerial and cost accounting.

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A framework of strategic measure of KM

• However such aggregation has to have a focus. The
  emphasis on the value of knowledge and the effort
  put into measuring its value should focus on the
  strategic impact in the same way that that
  tangible assets are valued strategically by
  business organizations.
• Strategy is about a direction, a goal. It is a
  representation of where the organization wants to
  be.

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A framework of strategic measure of KM

• Strategic value comes from being able to adapt to
  change quickly.
• Strategic value comes from recognizing potential
  sources of innovation and the extraction and
  conversion of tacit knowledge.
• Therefore strategic value is a presumptive measure

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A framework of strategic measure of KM

• Simply summing the total of all operational value
  from knowledge neglects two important
  considerations, the alignment of outcomes to
  strategic plans and goals and the opportunity
  cost of foregone value by the non-disclosure
  and/or use of tacit knowledge.

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A framework of strategic measure of KM

• Measuring the strategic value of knowledge or KMS
  must involve then three dimensions
• 1. The measurement of aggregated operational
  value derived from knowledge.
• 2. A measure of the alignment between the value
  derived operationally and the strategic goals and
  plans of an organization and
• 3. Some measure of the opportunity cost of value
  foregone by its non-exploitation or disclosure.

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Case Study

• Largest Asset Management Company in Thailand
• CEO

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Case Study

• most companies use KM for operational purposes.
  However their impact is marginal
• In essence the CEO argued that the operational
  impact of KM initiatives derives business value
  marginally.

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Case Study

• The CEO noted that such use of KM and KMS was in
  a sense a short-term issue designed to create
  market confidence and increase the Market Value
  (MV) of the organization.
• This can be achieved through aggregation of the
  marginal revenues derived.

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Case Study

• However he also argued that such an impact could
  also have a minimal effect if the gains in value
  are only effective in the short term.
• This CEO argues that effective KM and use of a
  KMS can only derive real long-term strategic
  value if they create asset value which increases
  the capital stock of the organization.

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Case Study

• In effect he argues that the real strategic
  benefit of KM and the use of KMS derives from
  their potential to improve the capital asset
  basis of an organization.

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Case Study

• The strategic value of KM then derives from
  seeing the impact of the use of KM not from the
  marginal revenue aggregations from the use of
  various KM systems but rather from the value
  generated in terms of the strategic goals of the
  organization in the long term.
• KM has to foster sustainable business growth in
  both market value and strategic value through
  asset accumulation.

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Case Study

• He noted that opportunities have two impacts.
  In the short term they are opportunity costs at
  the margin and their real value is only their
  addition to any aggregation of marginal revenues
  in the organization. However, in the long term
  their impacts can be perceived differently. In
  the long term their value can contribute to
  business value as a multiplier. It can generate
  significant income, but only if it is aligned
  with strategy.

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Case Study

• In essence he argues that the alignment of KM
  initiatives and their outcomes with strategic,
  long-term goals is the source of sustained growth
  in business value.

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Case Study

• Therefore there has to be an alignment between
  what the organizations expectations about the
  value generated by KM are and the strategic goals.

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Conclusion

• To understand the strategic value of KM and the
  impact of KM systems it is important that the
  three measures argued for above are used.
• This research will continue to test these
  propositions with more CEOs.